Which factor plays a role in establishing the price, i.e. exchange rate of a country s currency?

Question:- Which factor plays a role in establishing the price, i.e. exchange rate of a country s currency?

Answer

In essence, the relative value of a country’s currency it can be explained by the forces of demand and supply, which happen within the Fx market. Some of factors that affect this supply and demand include; economic performance of a certain country, interest rates within this country and other countries, inflation rates, political stability within a country and trade balances. Existence of low inflation rates, high interest rates and trade surplus in economical value of a country, it tends to makes demand the currency higher thus causing an appreciation. On the other hand, poor economic performance, low interest rates, rate of inflation, and trade deficits lead to demand reduction hence depreciation. Other influential factors include; Speculation: Speculation involves making a prediction of future changes in the exchange rate, on the basis of market trends, and news items. Market sentiment: Market emotion also affects the exchange rate since it influences investor opinions about the exchange rate and its future direction. Interventions: The government of a country. So, fiscal and monetary policies help to regulate its currency value in the foreign exchange market.